17 comments:

shorting JGB's - the trade of the decade according to many great investors including paulo pellegrini and even your old employer kerr seemed to be putting that position on again and acknowledging the timing aspect>>

However I wonder;- is it crowded trade?- deflation is still as far as the eye can see- cultural differences?- yen risk of depreciating significantly and negating return?

They are only "real" returns if you cash them in--I don't imagine Mrs. Watanabe is. She'll sit on the bonds until maturity which will make the whole principal fluctuation moot (and besides, if she sold them she would most likely have to pay capital gains tax--don't know what that is in Japan, but it would cut into the return.)

But your point about govies is well-taken: the trade against them seems so obvious that it is probably not a good trade (at least in the short run.) I think the thing which is most attractive about the short bond trade is not the certainty of the reward but the potential payoff and the defined downside risk--albeit one with negative carry which can go on for a long long time.

short JGBs long Yen for the Japan death squeeze- short yen is an extremely overcrowded, misunderstood play. This is a country that has exhausted its policy options through decades of mercantilist bureaucratic authoritarianism- if JGBs start getting hit, the MOFs only option would be to start liquidating US assets to defend the bond market.

At anything approaching a market rate the government is already insolvent. As with shorting any fraud, timing is the big question, but the setup is so asymmetrical/reflexive I'm very interested.

Speaking of the printing press, when do you plan to cover your BBVA short? The reason I asked is because I am considering investing in a Spain index ETF such as EWP.

I suspect the market is over reacting to the contagion affect of the Greek crisis. The Greek economy by itself is too small to be a serious issue. The main concern is contagion within the Euro zone. To put that in perspective, the overall Euro zone's public debt level is comparable to that of the US (around 70% of GDP according to IMF). Much of the Euro zone public debt is denominated in Euro. Importantly, the Euro zone also owns the printing press.

I think the key question is when the Euro zone countries will stop fooling around and get serious. Eventually, the ECB will contain the current sovereign debt crisis. It has the print press and therefore has the mean. In the mean time, the market will continue to test everyone's resolve. Lehman has taught everyone the expensive lesson of indecisiveness. Because the Lehman failure has already happened, Europe is unlike to allow a repeat to the same magnitude on the downside. As such, my guess is the European market will turn near or before the market level reached at the end of 2008 (and not the much lower level reach in March of 2009). This is the best I can do on estimating the timing. This is why I am curious as to your plan to cover you BBVA short. What is a good method to estimate timing?

There are a number of reason I like Spain. Like other countries, the belt tightening has already happened in Spain since the start of the financial crisis in late 2008. What remained in the economy is likely the more rigid demands that are more difficult to compress further. I disagree with the view that because Spain couldn't devalue the Euro, it couldn't improve it's competitive position. The Euro from it's recent peak has already devalued more than 20% relative to the dollar. Europe has already gain a huge competitive advantage relative to the US and all the countries that peg to the dollar. Within the Euro zone, Spain is likely to have gained more competitive advantage relative to the healthier countries such as German and France. This is because wage pressure and other cost structure adjustment pressures are higher in Spain than in German and France. Lastly it is cheap. The P/E of EWP Spain index ETF is now probably below 11. German's EWG ETF has a P/E of 23.

a veteran yen trader here always says, "no gaijin ever made money shorting JGBs". even though Japan has severe macro, fiscal, and demographic problems, i would bet the day the new JGB short / long OTM payers crowd makes big bucks is not coming soon.

I seriously don't understand the rationale of going long yen in any form.

Owning a yen is having a claim on the future output of the Japanese economy--which is going down from terrible demographics. Therefore, your claim is getting smaller and smaller as time goes on.

At the same time, because of govt deficits and their need/desire to stimulate the economy, there are more and more yen in circulation, ultimately in the form of bank deposits that are essentially sitting there and gathering dust as elderly Japanese prepare for retirement.

At some point, the retiring generation is going to want to want to spend those yen they've been saving up so painstakingly for so long.

What the heck happens to the economy then? it seems to me like a lot of yen chasing a smaller pool of potential GDP... This is something we haven't witnessed in a major industrialized country... ever.

On an economic basis, in theory you would short JPY, but with Japanese being huge savers they also have huge offshore holdings. Unfortunately Japan's economic problems are a slow death, so if a crisis does happen it is more likely to occur overseas, and when that happens huge flows of funds are brought back onshore (Japan) as the Japanese reduce their risk appetite. We are seeing this with AUD/JPY at the moment which "ideally" should be above 85+ but because funds are flowing back onshore from EUR crisis and AUD getting creamed.

It maybe perverse, but it is better to hold JPY simply because it is the most reliable **dodgy** currency...

oh, and Mrs Wanatabe is long AUD/JPY some $40+billion on currency margin accounts. It is expected that if AUD/JPY hits 75, -10% on estimated average entry point, there is a big risk that AUD/JPY will experience a futher deep correction as the positions are unwound.

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.